Consultancy Agreements vs Employment Contracts

A consultancy agreement is a contract for services between a business and a self-employed consultant or their limited company.

Key Differences from Employment

Factor	Consultant	Employee
Control	Works independently	Directed by employer
Substitution	Can send substitute	Must do work personally
Mutuality	No obligation to accept work	Ongoing relationship
Financial risk	Bears own risk	No risk
Equipment	Provides own	Provided by employer
Integration	Outside business structure	Part of organisation
Exclusivity	Works for multiple clients	Usually exclusive

Consultancy Agreement Contents

A consultancy agreement should include:

Services

• Specific scope of work
• Deliverables and milestones
• Standards and quality requirements

Payment

• Fee structure (fixed, daily rate, milestone-based)
• Invoicing requirements
• Payment terms (typically 14-30 days)
• Expenses (if reimbursable)

Duration

• Start date
• End date or project completion
• Review points

Termination

• Notice period (both parties)
• Termination for breach
• Consequences of termination

Intellectual Property

• Ownership of work product
• Pre-existing IP
• Licensing arrangements

Confidentiality

• Protection of confidential information
• Duration of obligations
• Exceptions

Liability

• Limitation of liability
• Professional indemnity requirements
• Insurance requirements

IR35 Considerations

What Is IR35?

IR35 (off-payroll working rules) determines whether a contractor should be taxed as an employee for a specific engagement.

Who Determines Status?

Client Size	Who Decides
Small private sector	Contractor's company
Medium/large private sector	Client
Public sector	Client

Small company definition: Meets 2 of 3 criteria:

• Turnover under £10.2m
• Balance sheet under £5.1m
• Fewer than 50 employees

Inside IR35 Consequences

If inside IR35:

• Tax and NI deducted at source
• Contractor receives less net pay
• Potential IR35 tax liability on historical payments

Key IR35 Indicators

Inside IR35 (employment-like):

• Client controls how, when, where work is done
• Consultant must do work personally
• Ongoing, mutually-obligated relationship
• Paid fixed salary regardless of output
• Uses client's equipment
• Works exclusively for one client

Outside IR35 (genuine business):

• Consultant controls working methods
• Right to send capable substitute
• No guaranteed work between projects
• Paid by results/project
• Uses own equipment
• Multiple clients

Status Determination Statement

For medium/large clients, the client must:

1. Make reasonable care determination
2. Provide Status Determination Statement (SDS) to contractor
3. Provide SDS to any agency in the chain
4. Be prepared to justify determination

Genuine Consultancy Indicators

To support outside IR35 status:

1. Multiple clients - don't work exclusively for one
2. Substitution clause - include and be prepared to use
3. Project-based - clear deliverables, not just time
4. Own equipment - use your own laptop, software
5. Business presence - website, marketing, other clients
6. Financial risk - fixed price with risk of loss
7. No integration - don't attend all staff meetings

Employment Rights

Genuine consultants are not entitled to:

• Holiday pay
• Sick pay
• Pension auto-enrolment
• Unfair dismissal protection
• Redundancy pay
• Minimum wage (they set their fees)

However, if the relationship is actually employment, these rights apply regardless of what the contract says.